Has Frontline Become the Perfect Stock?
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Frontline (NYS: FRO) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Frontline.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
2 out of 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
When we looked at Frontline last year, it had a higher score of 4. A collapse in its dividend and a lack of profitability are to blame for the drop.
It's been a horrible year for the oil tanker industry. Civil strife in northern Africa and the Middle East has taken its toll on oil production, and falling demand has coincided with a glut of ships to present truly terrible conditions for tanker companies. Recent rates for shipping have been so low that Frontline and competitor BW Maritime actually refused to take on cargo during the summer.
As a result, it's no surprise to see Teekay (NYS: TK) , Nordic American Tankers (NYS: NAT) , and Overseas Shipholding (NYS: OSG) all trading with Frontline near yearly lows. Although Nordic American CEO Herbjorn Hansson wrote a letter to shareholders in August saying that he was bullish on tanker shipping, even a pickup in demand won't immediately translate into great results for Frontline.
Nevertheless, times won't be terrible for tankers forever. Just as a bouncing Baltic Dry Index has boosted prospects for DryShips (NAS: DRYS) , Eagle Bulk Shipping (NAS: EGLE) , and other bulk cargo shipping companies, so too will the eventual return of higher shipping rates help tanker stocks.
For now, though, the disappearance of Frontline's former double-digit dividend yield and its persistent debt make the stock far from perfect. Until the shipping environment gets better, Frontline will have trouble making any headway toward perfection.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.
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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."
At the time this article was published